Alessandro Beber and Marco Pagano have summarized their recent paper on short-selling bans in a VoxEU article Short-selling bans in the crisis: A misguided policy:
The evidence suggests that the knee-jerk reaction of most stock exchange regulators around the globe to the financial crisis – imposing bans or regulatory constraints on short-selling – was at best neutral in its effects on stock prices. The impact on market liquidity was clearly detrimental, especially for small-cap and high-risk stocks. Moreover, it slowed down price discovery.
Perhaps the main social payoff of this worldwide policy experiment has been that of generating a large amount of evidence about the effects of short-selling bans. The conclusion suggested by this evidence is best summarised by the words of the former SEC Chairman Christopher Cox on 31 December 2008: “Knowing what we know now, [we] would not do it again. The costs appear to outweigh the benefits”. We hope that this lesson will be remembered when security markets face the next crisis.
Also on VoxEU, Hans Gersbach makes an interesting proposal in Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity:
The central bank would have two instruments at its disposal:
(a) the short-term interest rate and
(b) the aggregate equity ratio of the banking sector defined as the ratio of total end-borrower lending (credit for non-financial firms, households, and governments) plus other non-bank assets to total equity in the banking sector. The aggregate equity ratio is the measure of the capital cushion of the banking sector.
As a consequence, there are two policy rules for the central bank: an interest rate rule and an aggregate equity ratio rule. The former is a traditional interest rate rule (see for example Gali (2008, Chapter 3)) that may include an additional variable capturing the current state of money and credit, as discussed below. The latter relates the required equity ratio of the banking system in the next period to the current aggregate equity ratio and to the state of money and credit.
…
The current proposal aims at separating the responsibilities and instruments regarding capital requirements and bank supervision. The proposal places a substantial burden on the shoulders of central banks with regard to inflation and financial stability. Together with current events, the function of central banks as a lender of last resort indicates that this burden cannot be avoided. Accordingly, it makes good sense to equip the central bank with two instruments (short-term interest rates and aggregate equity ratios of the banking system) to help them bear this burden, while leaving detailed bank regulation and supervision activities to separate authorities.
In other words, counter-cyclical capital requirements would be set by empirical judgement, rather than with any of the various formula-based currently being discussed.
Citigroup is developing a new derivative:
the CLX is constructed as a sum of the Sharpe ratio – deviations from the mean divided by volatility – of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series.
…
“The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don’t worry about interest-rate exposures any more – they just pay a fee to hedge it,” [Terry Benzschawel, a managing director of quantitative credit trading strategy at Citi in New York and head of the team researching the product] says.
…
Chris Rogers, chair of statistical science at Cambridge University, said the only participants able to sell CLX-based products would probably be those who are too big to fail.
I have to wonder about the statement that funding costs can be hedged by the index … the only sure way of doing that is by borrowing longer in the first place and in a crisis funding costs are going to be highly company specific. And I must admit that I am deeply suspicious of an index based partly on “structured credit spreads” – not just idiosyncratic by instrument but also by whoever’s providing the quote and how much they want to quote firm.
Another day of relatively light trading; PerpetualDiscounts lost 4bp while FixedResets gained 3bp in a reasonably well-behaved market.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 3.05 % | 3.71 % | 28,541 | 20.16 | 1 | 1.5890 % | 1,809.8 |
| FixedFloater | 5.72 % | 3.79 % | 34,429 | 19.23 | 1 | 0.0000 % | 2,762.3 |
| Floater | 2.08 % | 1.77 % | 40,065 | 23.11 | 4 | 0.3451 % | 2,207.0 |
| OpRet | 4.84 % | -2.94 % | 106,236 | 0.09 | 13 | 0.2248 % | 2,321.5 |
| SplitShare | 6.31 % | 2.23 % | 147,264 | 0.08 | 2 | 0.3711 % | 2,130.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2248 % | 2,122.8 |
| Perpetual-Premium | 5.77 % | 5.54 % | 81,622 | 2.01 | 7 | -0.1245 % | 1,891.2 |
| Perpetual-Discount | 5.83 % | 5.86 % | 170,982 | 14.08 | 69 | -0.0377 % | 1,808.6 |
| FixedReset | 5.42 % | 3.61 % | 316,029 | 3.79 | 42 | 0.0306 % | 2,180.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSB.PR.C | Perpetual-Discount | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 22.13 Evaluated at bid price : 22.27 Bid-YTW : 5.80 % |
| BAM.PR.E | Ratchet | 1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 25.00 Evaluated at bid price : 18.54 Bid-YTW : 3.71 % |
| BAM.PR.O | OpRet | 1.80 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.06 Bid-YTW : 3.85 % |
| IAG.PR.A | Perpetual-Discount | 2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 5.86 % |
| PWF.PR.L | Perpetual-Discount | 2.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 21.52 Evaluated at bid price : 21.52 Bid-YTW : 5.98 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| PWF.PR.I | Perpetual-Discount | 264,550 | Nesbitt crossed 250,000 at 24.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 24.49 Evaluated at bid price : 24.83 Bid-YTW : 6.08 % |
| TRP.PR.A | FixedReset | 57,110 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.03 Bid-YTW : 3.79 % |
| TD.PR.R | Perpetual-Discount | 42,072 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 24.45 Evaluated at bid price : 24.67 Bid-YTW : 5.71 % |
| TD.PR.N | OpRet | 31,300 | RBC crossed 30,000 at 26.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-03-10 Maturity Price : 26.00 Evaluated at bid price : 26.18 Bid-YTW : -2.94 % |
| TD.PR.O | Perpetual-Discount | 30,462 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 21.59 Evaluated at bid price : 21.92 Bid-YTW : 5.56 % |
| CM.PR.H | Perpetual-Discount | 27,759 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-02-08 Maturity Price : 20.62 Evaluated at bid price : 20.62 Bid-YTW : 5.87 % |
| There were 27 other index-included issues trading in excess of 10,000 shares. | |||